S&P Global Ratings changed its outlook on China Tourism Group Duty Free (HKG:1880, SHA:601888) and subsidiary China Travel Service (Holdings) Hong Kong to negative from stable, as it forecasts more headwinds in the next 12 to 18 months.

The rating agency estimates a year-over-year decline of more than 25% in the tourism company's duty-free sales from Hainan in H1, driven by soft discretionary spending in China and the resumption of outside travel.

The company may also see leverage above S&P's downside trigger of 3.4x in H1, given increased capital expenditure and potentially raised concession fee rates paid to airports, S&P said.

However, the company will see a slower pace of sales contraction in the next months before steadying in 2025, which would also help temper leverage to less than 3x in 2024, the rating agency said.

The Hainan duty-free segment is integral to China Tourism Group, with the EBITDA from the province comprising more than 60% of the group's overall EBITDA in 2023, according to the rating agency.

S&P could downgrade China Tourism Group's ratings if it sees a more volatile duty-free business, an increase in the debt-to-EBITDA ratio above 3x or a sustained rise in overall concession rates.

The rating agency could revise the outlook to stable under a recovery in the company's duty-free business in Hainan and a solid cash flow due to prudent financial management.

S&P maintained the company's A- long-term issuer and issue credit ratings on the outstanding guaranteed debt.

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